A Donald Trump victory in the race for the White House is widely seen as bullish for European defence stocks, given his warnings to scale back U.S. military support in the region and force NATO members to spend 2% or more of their GDP on defence.

However, should he win and follow through on pledges to bring about a rapid end of the war in Ukraine, there is the possibility that the sector goes through heightened volatility.

JPMorgan has advised clients to hedge against short-term declines going into the November 5 vote.

WHY IS IT IMPORTANT

Analysts estimate a Ukraine ceasefire could trigger big declines in defence stocks, but stock pickers look ready to jump in to add exposure to this high-growth sector at a bargain.

Shares in Germany's Rheinmetall, Sweden's Saab , and Italy's Leonardo have risen 230-360% since Russia invaded its smaller neighbour in 2022.

France's Thales and the UK's BAE Systems are up 70 and 100%, respectively over the same period.

BY THE NUMBERS

The increased likelihood of Washington bringing peace to Ukraine could trigger an initial share price drop in European defence stocks of up to 20%, according to Citi estimates. The U.S. bank views a Kamala Harris win as keeping the status quo.

And there is also the potential for more inflows, which could support any rally going forward. Morgan Stanley's investor positioning data shows 72% of global funds have no exposure to the European defence sector.

KEY QUOTE

"There will be a big drawdown the day that some sort of (Ukraine) ceasefire is announced. But that day is going to be a very good one to buy these companies," said Vontobel portfolio manager Bob Hansen in New York, who is an investor in Rheinmetall. "The defence sector is on a continued structural growth path".

(Reporting by Danilo Masoni; Editing by Amanda Cooper and William Maclean)